Trade, War, and China in the 21st Century - Further Reading

Panel I: The World in Pieces: Challenges to the International Order.

For 75 years, the world has moved slowly but steadily to greater industrial and financial integration, and in some regions to greater political integration. Most citizens of the U.S. came to assume that further integration was inevitable – and beneficial. But today this is suddenly no longer such a clear-cut case. On the contrary, there is a fast growing public sense of disintegration and incipient conflict.

“China’s entire strategy for asserting its maritime claims is guided by a belief that exercising a military option in the next decade would prove too costly for America and its allies — and indeed for China itself. Instead, it has resorted to using economic influence to bully and coerce its neighbors. Until Washington recognizes this and develops a mercantile strategy to match, China is likely to continue changing facts on the water. Beijing regularly uses elements of Chinese economic power, especially Chinese state-owned enterprises, to enforce claims and colonize disputed areas. China has prevailed upon Chinese companies to build or expand seven artificial islands in the South China Sea in recent years. CNOOC, China’s largest state-owned oil firm, repeatedly anchors one of its deep-water rigs within Vietnam’s exclusive economic zone.”

“Even as the US pivots towards Asia, one of its most longstanding allies in the region appears to be turning away. “China is now in power, and they have military superiority in the region,” Rodrigo Duterte, the Philippines’s new president, said this week as he announced the end of joint naval patrols with the US in the disputed South China Sea, and expelled US forces from southern Mindanao. The developments come amid a broader fracturing of the geopolitical landscape in Southeast Asia in the face of deepening Chinese influence.”

“The South China Sea is one of the world’s busiest shipping lanes, through which more than $5 trillion in maritime trade passes each year. But the vast waterway is also one of the planet’s most contested spaces, with competing claims from various regional governments that have led, over the decades, to fatal skirmishes and diplomatic deep freezes. China, the region’s greatest power, demarcates nearly all of the South China Sea as its own … Since taking power in late 2012, China’s President Xi Jinping has asserted his nation’s South China Sea claims more vigorously, embarking on an island-building campaign that has turned mostly underwater features into patches of land large enough to host military runways.”

“For all the shock and awe on Wall Street and financial markets around the globe on Friday, the imminent danger to the underlying American economy is relatively small. What’s far more worrisome is whether Britain’s decision represents an end to [economic integration and the opening of markets abroad.]”

“Asked about the biggest risks facing the financial markets, more than half of fund managers polled by Bank of America Merrill Lynch this month cited geopolitics and protectionism. And that seems hardly surprising, given the Brexit vote, the failed Turkish coup and the nomination of Donald Trump as the Republican presidential candidate.”

Panel II – Industrial Interdependence and War.

Thomas Friedman in The World is Flat famously wrote: “No two countries that are both part of a major global supply chain… will ever fight a war against each other.” But China’s increasingly provocative behavior in the East and South China Seas increasingly challenges that conventional belief.

We have known for a century and a half that the highly interlinked structure of the financial system means that a panic in one country can trigger outsize effects in another. But what we saw after the Tohoku earthquake of 2011 and the Lehman Brothers collapse in 2008 were examples of a new phenomenon—the industrial crash. The industrial system is also highly interlinked internationally. It is a phenomenon that poses entirely new risks, to individual businesses and to our society as a whole. These risks range from the amplification or even triggering of financial crashes to the outright seizing up of vital systems of supply;

“The anxiety triggered by [the 2011 earthquake and Tsunami in Japan] highlights the growing importance of supply-chain strategy to Blue Coat and countless other manufacturers worldwide. It has forced them to question the resilience of networks that have grown increasingly complex and far flung, and to look at ways of reducing vulnerability to such unforeseen interruptions.”

Washington’s failure in recent years to keep careful watch over what goods are made where — especially when it comes to such vital items as electronics and drugs — means the United States now depends far more on China than vice versa.

“Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports to Japan of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles.”

“U.S. defense contractors have become completely reliant on Chinese sources for rare-earth metals, alloys, and magnets—directly or indirectly. The short list of reliable non-Chinese metallurgy companies get all of their rare earth oxides from China and their production is fully committed to Japan and other industrial users. Outside this small circle, there is an even shorter list of financially troubled metallurgical companies that have ongoing quality control issues, limited capabilities, and uncertain economic futures. None of these currently supply U.S. defense contractors. The reality is that all rare earth metallurgy used in U.S. defense systems originates in or must pass through China.”

Panel III: Hollywood and Beijing.

In the 1990s, President Bill Clinton, in his major strategic statement on U.S.-China relations, famously said that the Internet and Hollywood would liberalize China, by bringing American values and American culture to Chinese citizens. But two decades later, it’s clear that’s a two-way street.

“In its bumpy ride with China, Hollywood has been on a hot seat, enduring both interference from the Chinese censor and media backlash at home. Indeed, the rumblings have been that Tinseltown is kowtowing to China. Evidence of such compromises includes changing a film setting from the old glory of Paris to the new glory of Shanghai ("Looper"), depicting a Chinese scientist as a hero who comes to the rescue of Western civilization ("Red Dawn") and portraying Beijing, and thus China, as the land of promise ("The Karate Kid”).”

“In a potential watershed moment for Hollywood, the company behind “The Dark Knight,” “Jurassic World” and “The Hangover” is about to become Chinese-owned. Dalian Wanda Group, the giant Chinese media and real estate company, is closing in on a deal to acquire a majority stake in Burbank-based Legendary Entertainment … The deal would represent the first acquisition of a major U.S. production company by a Chinese investor and is expected to be finalized and announced by early next week. Until now, Chinese media companies have pursued narrower deals in Hollywood, such as investing in movies or providing financing for co-productions.”

“Chinese money is flooding Hollywood, backing many studios and projects, for at least two clear purposes. Thee first is a focus on promoting Chinese soft power via cultural production, and the second is an attempt on the part of the Chinese to learn and build from America’s expertise in the space, sot that China will be able to develop a stronger domestic film industry.”

“Kokas’ book examines the relationship between China and Hollywood after China joined the WTO in 2001, as “the distinctions between Hollywood’s “dream factory” and the PRC’s “Chinese dream” of global influence [have] become increasingly blurred.””

Stephen Colbert's Pander ExpressIn the wake of The Martian, a profitable blockbuster with a central plot point casting the Chinese government in a favorable light, Stephen Colbert mocked Hollywood’s close relationship with Chinese censors via his own bit of pandering to the country’s government.

“Hollywood’s been compromising to please the censors too, cutting whole sections out of films before they’re released in China. Like scenes depicting Chinese bad guys in Men in Black 3. But Dede Nickerson, the China-based American producer, thinks U.S. studios are learning how to avoid that kind of meddling by the government. “You’ll see less and less of that because China is so important to Hollywood that I would say that those decisions are going to get made when a film is being green lit to be careful about what may be offensive to Chinese people or to the Chinese authorities.” … Self-censorship is the cost of doing business in China and a price U.S. studios are willing to pay.”

“There is growing concern that Chinese government influence over Western media organizations will lead to direct censorship or pressure to self-censor content to Beijing’s liking. This concern will only grow due to a surge of Chinese investment in the United States. Over the past five years, Chinese investment here has grown from $2 billion per year to an estimated $20 billion this year. This growth is significant given that Chinese companies are effectively controlled — whether through state ownership or strict direction — by Beijing. … By controlling the financing and distribution of American movies, and subjecting them to censorship to gain access to the Chinese market, Beijing could effectively dictate what is and isn’t made — providing powerful control over America’s greatest cultural exports.”

Panel IV – Systems and Power: Who Really Rules?

Since WWII the U.S. has been the main regulator of the world monetary and energy systems. The U.S. for many years was also the main regulator of industrial and scientific activity and of trade in food, metals, and other commodities. But today it is increasingly China that wields these powers.

“Despite China signaling moves to cut its excess steel production capacity, industry chiefs say the country has declared a metals "war" that has had a "devastating" impact for the rest of the world's industry. Overcapacity in the steel industry has been a thorn in the side of the sector in recent years, pushing prices down and making it harder for some steel companies to survive.”

“China has become the largest crude oil operator in the North Sea despite boasting that it uses deep-water oilrigs as strategic weapons. The scale of Chinese growth in the region meant that Britain handed about £2 billion in tax breaks to one state-run oil company last year, analysis by The Times has shown.”

“Theresa May is to consult her senior security advisers on whether to allow China to take a stake in Britain’s nuclear power sector. The prime minister confirmed at the G20 summit in China that she was seeking advice on the security aspects of Beijing’s plan to invest £6bn in the Hinkley Point project. … Mrs May’s plan to consult her security experts reflects the fear expressed by Nick Timothy, her joint chief of staff, that China could install “back doors” in nuclear facilities allowing Beijing to turn off the lights in Britain at a time of tension.”

“After a customer canceled a large order at the last minute, shares in Aixtron, a German high-tech company, sank fast. Months later, with the stock still reeling, a Chinese investor agreed to buy the company. If only it were as simple as smart deal-making. Financial filings and public statements indicate a web of relationships among the customer, the buyer and the Chinese state. The links highlight the blurred lines between increasingly acquisitive Chinese companies and Beijing’s long-term industrial policy.”

“As our biggest manufacturers and traders and investors succeed in China, they also come to depend on China for future profits — which brings them increasingly under the sway of a Chinese state that holds the power to cut those profits off. What if the master capitalists and corporate bosses who have so cowed us here at home are themselves being cowed in Beijing? What if the extreme economic interdependence between the United States and China is not actually carrying our values into a backward and benighted realm, but accomplishing precisely the opposite — granting the Chinese Politburo ever-increasing leverage over America’s economic and political life?”

“Stock markets in China may be in bear market territory, but that has not stopped Chinese firms from going on a buying spree for American companies. Direct investments from China put over $15 billion into transactions in the U.S. last year, a near-30 percent increase compared to the previous year and a new all-time high. Early indication points to 2016 as yet another record year for Chinese investments.”

In her new book, Edwards argues that Investor-State-Dispute-Settlement – a system often included in international trade deals by which corporations can sue states before little known arbitration tribunals – is “being exploited by multinational corporations at the expense of sovereign nations and their citizens.” The result is a situation in which corporations – including those closely associated with a state like China – can sue sovereign nations in supranational quasi-courts that present no legal recourse to plaintiff countries.